The second half of 2022 is approaching. Six months isn’t much of a time horizon, even for a relatively short-term trader. But as I have a new batch of Aim stocks for you to consider today, let’s check in with my picks from the start of the year (‘Four speculative Aim shares for 2022’, 7 January 2022) to see if the theses still hold.
React (LSE: REAT): 1.15p – HOLD
My first pick was cleaning services firm React Group at 1.4p. Small caps can be volatile, with the stock trading above 2p only to close as low as at 1.10p recently. The company raised its market capitalisation in cash for the acquisition of LaddersFree – a capital-light business that the board believes can be integrated into React’s offering then scaled up. Shareholders may be smarting from this, but the board believes this is an incredible opportunity given LaddersFree’s service partner network and its impressive gross margins of more than 50% in the last two trading years.
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Chair Mark Braund believes this can even grow – LaddersFree recently won a competitive tender which apparently came in “significantly below” the price of the next competitor. The deal is materially earnings-enhancing and none of the board are taking large six-figure salaries from the company (unlike many Aim shares), instead aiming to be remunerated through their options. Put simply, there is no reason to do this deal unless the board believes in the long term. So while there may be short-term pain, the investment thesis hasn’t changed.
Shoe Zone (LSE: SHOE): 160p – HOLD
This shoe retailer, which is very much bucking the “high street is dead” narrative, was my second pick at 110p, and it has already delivered a return of more than 45%. It’s also reinstated the interim dividend, which is not something management would do unless it was sure it could continue. I believe there’s more to come – if anything the investment thesis is now even stronger.
Iofina (LSE: IOF): 21.5p – SELL
My third pick was iodine producer Iofina at 18p. The stock has risen slightly but I’ve chosen to sell. The company is benefiting from a rising iodine price ($40 in October – now more than $60). Construction of its IO#9 plant was ‘in negotiations’ in the interim results in September 2021 and still in negotiations in December 2021 with the company expecting to “finalise an agreement in early Q1 2022”, and “close to finalising an agreement” in April 2022. Management has repeatedly failed to deliver, with zero acknowledgement of previous goals, nor any reason as to why Q1 turned into Q2 which will likely now turn into Q3.
Operationally, the company continues to trade in line with expectations and looks cheap, but this lack of communication, coupled with a hard-to-research commodity market, means I have chosen to sell due to my lack of trust and lack of understanding. I suspect it will perform well should the iodine market tighten. Iofina has been transformed from the debt-ridden business it was a few years ago, but it’s not for me.
Yellow Cake (LSE: YCA): 372.5p – HOLD
My final pick was Yellow Cake at 340p. It has traded as high as 485p but is currently around 372.5p. Uranium is starting to gain traction, with prime minister Boris Johnson pledging to move the UK towards nuclear power. Uranium miner Cameco noted in a recent earnings call that contracting in the first quarter was already above the 2021 total – a sign that utilities are now looking to lock in agreements. Yellow Cake is a pure play on uranium – with the investment case looking stronger, I remain a holder.
Another four Aim stocks for the second half of 2022
It just shows that even a mere six months can offer investors a wild ride in terms of volatility. This can even create opportunities – if you sold Yellow Cake at 480p you could now buy back the same shares at a discount of more than £1 – a nice turn! But it’s also a valuable reminder that share price fluctuations do not always reflect a great deal about the underlying business. The key is to do your own research and manage risk. Here are four more shares where I feel the potential upside is greater than the downside.
Digitalbox (LSE: DBOX): 9.25p
Digitalbox produces and publishes online content. It owns several publishers including Entertainment Daily, The Daily Mash, and The Tab. Its goal is to buy publishers that have great content but are struggling to monetise effectively. It has so far struggled to set the market alight, although in fairness 2020 saw ad revenue decline before starting to pick up by the end of the year. The company bought The Tab and is now seeing a return on investment, having integrated the business into Digitalbox’s proprietary Graphene platform. Digitalbox saw its first net profit in 2021 and is cash-flow positive. It bought TVguide.co.uk last month, which will immediately enhance earnings. This fits its model of buying smaller businesses then growing both the content quality and ad inventory. It’s a similar business mode to Future (MoneyWeek’s owner) but with one key differentiator: Digitalbox is primarily focused on mobile inventory.
At 9.25p the shares trade on a forecast price/earnings ratio of less than 12 but the real risk is heavy dilution should the board raise at a steep discount. That said, I’m comfortable with this risk and believe the board is aligned with shareholders. If the business keeps executing then this could be a much bigger and more profitable business.
Northbridge Industrial (LSE: NBI): 193p
Specialist industrial equipment group Northbridge Industrial Services has sold its Tasman drilling division and is now solely focused on Crestchic loadbanks (electrical testing equipment). To reflect this new strategy, the company will be changing its name (assuming the resolution is approved at its AGM) to Crestchic with the EPIC code LSE: LOAD.
Crestchic is a global business, and management believes it can be scaled up. Northbridge has completed a new loadbank production facility that will increase production capacity by 60% to meet strong levels of customer demand as well as future-proofing the business. Crestchic currently has 10% market share of the global power reliability market and the goal is to grow further in this expanding market.
The directors have been strong buyers of stock here, with Nicholas Mills, a non-executive, owning more than 24% of the stock. This is a turnaround play – the business has sold an unwanted unit and has a clear focus on growing production and capturing market share. The stock currently trades on a p/e of 15, so while it’s not cheap, the valuation is reasonable for a company now on a growth trajectory.
PCI-PAL (LSE: PCIP): 66p
PCI-PAL is a solution provider for card-not-present (CNP) transactions. PCI-PAL solves the problem of the secure handling and storage of customer data for contact centres, which are increasingly becoming omnichannel. GDPR is a problem for clients because breaches and customer data misuse can carry huge reputational and financial penalties. Companies can instead outsource this risk to PCI-PAL and get on with focusing on their core business.
This makes PCI-PAL one of the most exciting companies on the London market because of the sheer size of its potential market. Last year, it raised £5.5m at 95p to accelerate growth. This pushed losses out even further, but the board believes that going after growth is the best strategy. Annual recurring revenue (ARR) has now gone above £10m, and customer churn rates are below 3% – in other words, once customers have signed up to the service, they are reluctant to leave. Not only that, but customers add users once signed up, which gives PCI-PAL net revenue retention of 118% as of the recent trading update.
The elephant in the room here is that the company is currently the subject of a lawsuit from one of its main rivals, Semafone. The directors believe it is unfounded, and have also gone on the attack with counterclaims against Semafone. Many investors would consider PCI-PAL uninvestable due to this legal risk. This is sensible. That said, I am long as the company’s growth is increasing and I believe a settlement will be reached.
Aura Energy (LSE: AURA): 11p
Aura Energy is a uranium exploration company which owns the Tiris asset in Mauritania. It’s a leveraged play on the uranium trade and is aiming to become a producer early in this cycle in 2024. The company raised A$8.8m (£5.1m) at a price of A$0.25 per share in Australia (which was around 14p per share in London – the share is dual-listed).
This placing was heavily oversubscribed yet the shares can now be bought at 11p in the market, despite nothing changing. The funds have been raised to complete extra drilling at Tiris to expand the resource and fund the start of engineering, working towards a decision to proceed in Q2 2022.
So far Tiris has around 56 million pounds of uranium with a cut-off grade of 100 g/t. It also benefits from shallow, flat-lying surface mineralisation (a depth of one to five metres). This means that no drilling and blasting, or crushing or grinding is required. Every dollar increase in the uranium price trickles down to the bottom line, because Tiris has an all-in sustaining cost of $29.81 a pound.
Aura is a pre-producer and so carries even more risk than your average mining stock. There is no revenue and it is reliant on external funding. If Tiris becomes a producing mine, financing will come easily. But we also have to remember that many junior mining companies list with the goal of achieving production but few ever achieve it.
Michael Taylor is long on REAT, SHOE, YCA, DBOX, NBI, PCIP, and AURA. For more market insights get Michael’s free Buy The Breakout weekly newsletter at shiftingshares.com/newsletter
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